How do wages affect the economy?

Tariff policy: Higher wages help the entire economy

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The economy has picked up strongly, exporters' sales have exploded, employment is rising and unemployment is falling. There are also complaints about the lack of qualified specialists. One would think that this is the time to push through significant wage increases. Because work is scarce and the demand is obviously high.

But hardly any higher wage demands have been made by the trade unions than in previous years, when a chorus of warning voices swells, evoking the specter of high wages. Signs of dwindling competitiveness and high inflation rates are painted on the wall. In particular, the ECB, headed by President Jean-Claude Trichet, urges the Germans to keep their wage increases moderate against the background of rising oil prices. Otherwise the ECB would be forced to intervene by raising interest rates to prevent inflation.

Gustav Horn

heads the Institute for Macroeconomics and Business Cycle Research of the union-affiliated Hans Böckler Foundation.

If this sounds familiar, you are not mistaken. We have heard all of this all too often in this decade and in the past. Whenever wage increases accelerated somewhat, when even real wage increases appeared possible, the same warning voices could be heard. In times of poor economic activity, it was the supposedly dwindling competitiveness and excessive cost burdens for German companies; in times of good economic activity, it was the supposedly high inflation rate that stood in the way of stronger wage increases. Between this Scylla of fears of competition and the Charybdis of the dangers of inflation, almost every increase in real wages in Germany has been crushed.

The result is that household disposable incomes have more or less stagnated over the past decade and inequality has increased dramatically. In particular, the middle and lower incomes were decoupled from economic development. All the returns from growth remained with the upper incomes, which consist very much of profit and property income and less of labor income with stagnating real wages.

If you look at the competitiveness of the German economy and the inflation rates in Germany in the recent past, the question arises as to whether these fears were actually justified. The answer is a clear no. Since the beginning of the last decade at the latest, there has been no talk of weak competitiveness in the German economy. Since then, Germany's current account has consistently shown increasing surpluses with other countries. This is a clear sign of a high level of competitiveness, since there is obviously a great demand for goods made in Germany. Indeed, the structural current account surpluses have also endangered the stability of the euro area. Warnings would have been appropriate if domestic demand was too weak because wages had not risen sharply enough.